The Road to Retirement Security: Time Is Your Ally

Mike Patton
, ContributorI provide analysis on the economy, investing and financial planning.Opinions expressed by Forbes Contributors are their own.

During the twentieth century, when industrialized America was at full throttle, it was common for companies to offer employees a lifetime pension based on a formula. The formula for this Defined Benefit plan might look something like this: # years of service X 2.0% per year X highest three years average salary. Let's assume your average salary was $50,000 per year and you worked 30 years. Your pension might look like this: 30 yrs of service X 2.0% per year = 60%. $50,000 X 60% = $30,000. Therefore, you would receive an annual pension of $30,000 for as long as you lived. However, if you were married and did not allow for a survivor benefit, and if you predeceased your spouse, they would receive nothing.

To provide a benefit for a spouse, you would have to take a reduction in your pension. As a result, you might receive $43,000 for life and at your death your spouse would receive a pension as well. Your could elect a spousal benefit equal to 100% of your benefit or a reduced survivor benefit set at, say, 50% of your pension. Of course, the greater the spousal pension, the greater the reduction in your pension.

One final note here. Assuming you were 65 when you retired, received $30,000 per year, and lived until you were 85, you would receive $600,000 as a total payout. This assumes there are no inflation adjustments in your pension. There is still considerable value here. For example, you would need to accumulate a lump sum of $392,560 to replace this pension given a 5.0% return on your nest egg during retirement.

How long would it take to accumulate $392,560? It depends on how long you have, what return you earn, and how much you can invest. The following tables will give you an idea of the amount required per year with different time horizons and rates of return.

Time Horizon: 10 Yrs

Annual Return

Annual Investment

5.0%

$31,210

6.0%

$29,783

7.0%

$28,412

8.0%

$27,098

Time Horizon: 15 Yrs

Annual Return

Annual Investment

5.0%

$18,192

6.0%

$16,865

7.0%

$15,622

8.0%

$14,458

Time Horizon: 20 Yrs

Annual Return

Annual Investment

5.0%

$11,872

6.0%

$10,672

7.0%

$9,576

8.0%

$8,578

Time Horizon: 25 Yrs

Annual Return

Annual Investment

5.0%

$8,225

6.0%

$7,155

7.0%

$6,207

8.0%

$5,370

As you can easily see, starting early is the most critical factor. However, if this is not feasible, save as much as you can. Just remember, it will require some amount of sacrifice today to provide for your future.